"With more than 95 percent of first-time homebuyers dependent on financing their home purchase, and a majority of first-time buyers reporting one or more financial challenges, the uptick we've already seen may price some first-timers out of the market," he said.

He said the higher mortgage costs will dampen both home sales and price increases next year.

"I do think rates will go up in 2017 another 50 basis points [a half percentage rate] because all signs are pointing to more growth that would indeed be inflationary in measure," Smoke said. "The Fed will likely move rates higher two more times next year."

Frank Nothaft, chief economist with CoreLogic, is also forecasting that fewer homes will be sold in 2017 because of the increase in finance costs.

"Stronger economic growth -- jobs and income -- will add to housing demand, but higher rates will weaken demand," he said. "I do think the net effect will be somewhat weaker home sales than we had previously expected for 2017."

The Mortgage Bankers Association says home purchase loan applications have fallen about 9 percent in just the last week. Most of the drop was in home refinance applications.

David Berson, chief economist for Nationwide Mutual Insurance, said the mortgage industry will see fewer home refis as rates move higher.

"On the purchase side, that is going to be offset by the stronger economy," Berson said. "Household formations are accelerating and wages are rising, and that will more than offset the rise in mortgage rates on the purchase side.

"Much of the rise is the market anticipating [Donald] Trump policies and Fed tightening," he said. "Those are already built into rates."

Berson sees more gradual interest rate increases ahead.

"I think rates will go up more next year," he said. "Above 5 percent? That's a 2018 story. I don't think it's a 2017 story.

"Rates are still really low -- they are just high compared with the abnormally low rates we've had," Berson said. "But every time rates go up, somebody is priced out of the market. No question about it."